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Bank loans for bad credit are expensive and hard to come by.
Banks may think they’re taking on more risk when they lend to people who have struggled with credit. And so having poor credit can mean facing higher interest rates on personal loan offers.
Here are some things to keep in mind if you’re considering bank loans for bad credit, and some options to consider if you can’t get a personal loan from a bank.
Banks and personal loans
A bank loan is a lump sum of money that a bank lends you with the agreement you’ll pay it back over a set time frame, with interest. Some bank loans have specific purposes, like mortgages or auto loans. Personal loans differ from mortgages and vehicle loans in several ways.
Typically, personal loans can be used for any purpose. Personal loans from banks can be for amounts as little as $1,000 or as much as $100,000. Funding can be quick — you may even be able to get the money in two to three business days. And your loan term and loan amount will vary based on the lender and your credit history.
There are two types of personal loans: unsecured loans, which don’t require collateral to secure the loan, and secured loans, which require collateral like a savings account or CD.
Banks generally have minimum income and credit-score requirements for unsecured loans. Some may also require you to have an account with them. Annual percentage rates, or APRs, typically range from about 6% to 25%. Banks typically offer higher APRs if you have low credit scores.
But every lender will have its own loan application requirements and criteria for what it considers an acceptable credit score and credit history. That’s why it’s important to shop for different loan offers when looking for bank loans for bad credit.
4 reasons it may be tough to get a bank loan for bad credit
1. Not all banks offer personal loans
Depending on where you keep a checking or savings account, you may be able to apply for a personal loan at your bank. Some banks offer discounts for people who bank with them and it can be convenient to keep all your accounts in one place.
But some big financial institutions, like Bank of America and Chase Bank, don’t offer personal loans. Visit your local bank branch or check its website to see what it offers. You may have to look elsewhere for a personal loan.
2. Banks tend to have strict credit guidelines
Banks that do offer personal loans may require you to have a credit score in the “good” to “excellent” ranges. Credit scores typically range from 300 to 850. According to FICO’s credit-scoring models, credit scores of 670 to 739 are considered “good.” Within these models, scores higher than that range are considered “very good” or “excellent.” But remember, every lender will have its own loan application requirements and criteria for what it considers an acceptable credit score and credit history.Learn more about credit score ranges
Banks offer the lower interest rates to people with higher credit scores.
Here’s what that looks like on a monthly payment. Let’s say a person with excellent credit is approved for a $5,000 personal loan with a 6% APR and a three-year term, and a person with fair or poor credit is approved for a loan with the same terms — but with a 25% APR. The person with excellent credit will pay $152 each month ($476 total in interest over the life of the loan). But the person with fair or poor credit will pay $199 a month ($2,157 total in interest).
3. Banks may have annual income requirements
Banks want to know you have the resources to pay back a personal loan. To get an idea of your financial situation, they may set minimum income requirements and ask for proof of income. If you apply for a loan and don’t meet these standards, you might not qualify for it.
4. Some banks may require collateral
Your bank may offer both secured and unsecured personal loans, but poor credit may only qualify you for a secured loan. Once you’ve secured a loan with collateral, typically a savings account or CD, you may not have access to those funds until the loan is paid in full. But you’ll usually continue earning interest on the funds in your savings account or CD while the account is securing the loan.
Try applying for prequalification
If you’re not sure whether you would qualify for good terms, applying for prequalification for a personal loan can give you a sense of whether you might be approved without affecting your credit. After you provide a info about your income and monthly debt obligations, lenders review that information and perform a soft credit inquiry. This won’t negatively impact your credit reports or scores. You can apply for prequalification at several banks to compare APRs, term lengths and any fees, such as origination fees.
To get an idea of the terms you might qualify for, you can check your credit scores for free at AnnualCreditReport.com, where you can get a free report from each of the three main credit bureaus once a year. You can also check your credit scores at two of the three main consumer credit bureaus at Credit Karma, too.
How to spot a bad credit loan scam
Having poor credit could put you in a vulnerable position when searching for a loan. But you don’t have to accept just any offer — especially if it looks risky. Watch for these red flags when it comes to a bank loan with bad credit.
- No credit check: Lenders will consider your credit when reviewing your loan application. Typically, they’ll perform either a soft or hard pull on your credit history, verify your income and ask about monthly payments on debt obligations.
- Guarantees: Legitimate lenders won’t guarantee loan approval. At the very least, most lenders need to verify your age and income before lending you money.
- Constant marketing and scare tactics: Shady lenders might email and call you, pressure you into borrowing more than you can afford, or avoid directly answering your questions. Before working with a lender, check out the Consumer Financial Protection Bureau’s complaint database and read reviews at the Better Business Bureau website.
- High APRs: An affordable APR for a small loan is about 36% or less for short-term loans of around one to six months, according to the National Consumer Law Center.
- High or hidden fees: Read the fine print on any loan agreement so you know what kind of fees you might have to pay and whether the cost is manageable for you.
Alternatives to personal loans
Borrowers with low credit scores may struggle to get a personal loan from a bank. But before turning to high-cost alternatives like payday loans, consider these options first.
- Get a co-signer on a personal loan. A co-signer with good credit could boost your chances of getting a personal loan with a low APR, but they’ll need to understand the potential dangers involved. If you miss payments, both of you risk damaging your credit. And if you default on the loan, your co-signer will be responsible for repaying it. Not all lenders allow you to add co-signers, so read the terms before applying.
- Take out a personal loan from a credit union. Credit unions tend to offer lower interest rates than banks and may be more flexible with lending criteria. In fact, the National Credit Union Administration imposes an 18% cap on loans at federal credit unions.
- Seek a loan from an online lender. Some online lenders specialize in working with people with bad credit. But interest rates can vary widely, from around 5% up to 36%.
- Consider a balance transfer credit card. Many people use personal loans for debt consolidation, but you may be able to achieve the same goal with a balance transfer credit card. To save on costs, look for one with a long intro 0% APR and no balance transfer fees. Just make sure that you can meet the spending requirements — if there are any — to get this perk, and then remember to pay off your balance in full before the intro period is up so that you don’t have to pay interest on that balance afterward.
Getting a bank loan for bad credit can be tough. Not every bank offers personal loans, and the ones that do may have credit and income standards. And if you don’t qualify for an unsecured personal loan, the bank may ask you to secure the loan with collateral. But you still have options: Ask someone to co-sign your loan or consider applying at a credit union or online lender. You may even a score balance transfer credit card for a better deal.